Most people evaluate long-term care insurance the wrong way. Sales approaches also often stress the wrong factors. LTCI should be analyzed in much the same way we analyze investment opportunities.
Fear often is the focus of LTCI discussions. Scary statistics are used to try to convince consumers that they need the policies to protect them in case of the need for nursing home care and other assistance. The subject of long-term care makes all of us uncomfortable anyway, and this approach makes it more so.
The right approach to evaluating LTCI is the same as for auto and homeowners’ insurance, as well as our investments. I have never heard a sales pitch for auto and homeowners’ insurance use statistics about the odds of getting in an accident or having a fire at home. Instead, it is assumed that the consumer knows there is some probability of incurring such losses. The sales approach is to remind the consumer that he should buy protection against such a loss, and to argue that the policy being offered is affordable and is the best among the competition.
The approach you should take to LTCI is to recognize that there is a risk to your wealth and income if you should be among those who need care at home, in an assisted living facility, or in a nursing home. But there are other, nonfinancial risks that are reduced by LTCI. Loss of independence and personal dignity often result from needing long-term care and having to depend on others to provide or finance the care.
An overlooked risk of the need for long-term care is dissension in the family. There often is disagreement over where the care should be provided. If financing is limited, providing the care often falls unevenly among family members. That can dissolve family harmony.
After assessing the risks of long-term care, consider the sources of funding the care. Will you have enough income to pay for your regular expenses (especially if you have a spouse or any dependents) and for long-term care? Most of us do not. Long-term care in most areas is $100 or more per day. If not, which assets do you want to liquidate to pay for care if it is needed? How long will you be able to pay for care if assets are liquidated? How will liquidation of those assets affect plans for your loved ones and charity?
After evaluating those questions, as we do with other financial issues, ask how much risk you want to assume and how much you want to reduce or avoid. In our portfolios, we reduce risks by purchasing assets that seem to have a margin of safety and are selling at bargain prices. We also sell or avoid assets that seem overvalued. With long-term care, we reduce the risks by purchasing insurance to cover losses we cannot self-insure.
You might decide that using some of your income or liquidating some assets is the best way to pay for some of the long-term care. You also might decide to spend down your assets until you qualify for Medicaid, choosing to leave little or nothing to heirs if long-term care is needed.
Or you might decide it is desirable to have insurance that will assume all or a portion of the risk of long-term care.
If you decide LTCI is desirable, the next step is to design a policy that balances the coverage you prefer with affordablity.
In past visits, we have discussed ways to design an affordable long-term care policy. There are four key provisions that can be adjusted to reduce premiums. You do not have to buy the gold-plated policies many insurers prefer to sell. Instead, you can scale back the coverage and the premiums by changing the terms so the policy fits your budget while providing protection for your income and assets. Here is a summary of the key decisions. You can find more details in the Archive section of the web site and in my book The New Rules of Retirement.
Waiting period. Insurers usually call this the elimination period. It is the time you have to pay for care yourself before the policy starts to pay benefits. The standard period is 30 days. You can reduce premiums by paying for more of the initial care out of your own resources. Self-insure for the first year (at a cost of $50,000 to $150,000, depending on your location), and premiums will fall. Even an elimination period of 90 days or six months will have a significant premium savings.
Daily benefit. The policy does not have to cover the full cost of care. If the current rate for care in your area is $100 per day, premiums will be reduced if the policy covers $80 per day. Your own resources would pay the other $20 per day.
Keep in mind that the daily rate charged for long-term care covers only the basic services. Most who need long-term care have other charges that equal about 20% of the basic rate, such as prescription drugs and rehabilitation. Do not forget to include these costs in your calculations.
Maximum term. The most expensive policies pay for lifetime care. Few people have extended long-term care needs that last many years. Most long-term care lasts five years or less, with the bulk of care needs being for less than two years. Premiums are reduced if take the risk that you won’t be among the few needing truly long-term care. Buy a maximum coverage period of two years to five years, and the premiums will decline.
Inflation protection. This is not an area in which I recommend skimping, but buying less inflation protection reduces premiums. Long-term care cost rises faster than the rate of the Consumer Price Index. Most policies have an option for up to a 5% compounded annual coverage increase, and that is the best way to ensure that 10 or 20 years from now the policy will pay benefits comparable to what you thought you were buying today. But you can reduce premiums significantly by buying less inflation protection. You might buy a policy that fully covers long-term care at today’s prices and decide that the increases due to inflation will be paid from your income and assets. Keep in mind that inflation compounded over 10 to 20 years will be a substantial amount.
Cost is not the only factor to consider. Do not automatically take the lowest premium policy. Be sure that the insurer is financially stable. Also, choose an insurer that has been in long-term care for a while. There are many insurers who tried to capture a big share of this market with low cost policies. After a few years they decided to stop selling policies and dramatically increased premiums on remaining policyholders.
Finally, read the covered care sections closely, or have an experienced advisor do that for you. You do not want a policy that keeps premiums low by excluding care you assumed was included.
There also are new types of policies, such as combining long-term care and life insurance, to consider. We have covered these in past visits (available on the web site Archive) and plan to cover more new types of policies in upcoming visits.
Long-term care is a risk from which we all have some probability of incurring financial losses. As with auto accidents and catastrophes at home, you decide how much of the potential financial loss you are willing to pay from income and assets. Then, you seek a policy that fits your budget and covers the losses you do not want to cover. That is the right way to evaluate long-term care policy options.